Expectations are running high for software firm Adobe Systems Incorporated (ADBE). The company is set to take the earnings stage after the close of trading on Thursday, and Wall Street is looking for a sizable year-over-year jump in both earnings and revenue.
While the Fed’s decision on interest rates could make the situation more volatile, this scenario could play right into the hands of savvy options traders willing to take a risk ahead of the event.
Digging into the numbers, Wall Street is expecting 50 cents per share of Adobe stock in the third quarter, up a whopping 78% year-over-year. Furthermore, revenue is expected to rise 20.8% to $1.21 billion.
What’s more, a recent Morgan Stanley report said that “Resellers characterized Q3 as a better quarter vs Q2, due to typical seasonality as well as promotional pricing of CC Teams.” If this strong seasonality spills over into fourth-quarter guidance, Adobe stock could be poised for a bullish earnings reaction.
Historically, Adobe stock has a strong fundamental track record, besting Wall Street’s targets in five of the past six quarters. As such, some analysts on Wall Street have set their sights a bit higher. According to EarningsWhisper.com, the whisper number for Adobe’s third-quarter report comes in at 52 cents per share, 2 cents higher than the consensus.
Taking a closer look at the brokerage bunch, we find considerable bullish sentiment. Specifically, Thompson/First Call data reveals that 18 of the 25 analysts following ADBE stock rate the shares a “buy” or better, with nary a “sell” rating to be found. Additionally, the 12-month price target of $90 represents a modest premium of about 15% to Monday’s close, leaving room for potential price-target increases.
Click to EnlargeOptions traders are also quite bullish when it comes to Adobe stock’s prospects.
For instance, the September/October put/call open interest ratio currently rests at 0.27, with calls nearly quadrupling puts among options set to expire within the next two months.
This ratio moderates to a reading of 0.47 for the September series, but much of this trepidation may be due to the Fed’s interest rate decision that is slated to arrive ahead of Adobe’s report on Thursday.
Overall, September implieds are pricing in a potential post earnings move of about 4.6%. This places the upper bound near $82.40, while the lower bound lies at $75.10. Technically speaking, these levels coincide roughly with ADBE’s 50-day and 200-day moving averages. That said, there is little in the way of overhead resistance above the 200-day trendline, while technical support appears firm at the $75 level, just below Adobe stock’s 50-day.
2 Trades for Adobe Stock
Call Spread: Adobe stock has had a rough ride in the past couple of weeks, but most of this volatility has been due to broader market action. The company can erase much of this concern by reminding investors of the company’s growth when it reports earnings on Thursday. Barring any major glitches or surprises, the shares should resume their uptrend.
As such, those looking for an options trade on Adobe stock ahead of earnings might want to consider an October $80/$85 bull call spread. At last check, this spread was offered at $1.85, or $185 per pair of contracts. Breakeven rests at $81.85, while a maximum profit of $3.15, or $315 per pair of contracts, is possible if ADBE stock closes at or above $85 when October options expire.
Put Sell: Alternately, if you’re not sold on ADBE stock’s upside potential, or if you are worried about the Fed’s impact, a September $70 put sell has a high probability of finishing out of the money. At last check, this option was bid at 30 cents, or $30 per contract. As usual with a put sell, you keep the premium as long as Adobe stock closes above $70 when September options expire at the end of this week. On the downside, if ADBE trades below $70 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $70 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
